G.R. No. 135885; April 28, 2000
SPOUSES JUAN J. DIAZ and ELIZABETH L. DIAZ, petitioners, vs. JOSE DIAZ and COURT OF APPEALS, respondents.

FACTS

Private respondent Jose Diaz filed a complaint for sum of money against his brother, petitioner Juan Diaz, and the latter’s spouse. He alleged that they were co-owners of a Mandaluyong property sold in 1968. Juan Diaz used Jose’s P15,000.00 share from that sale to purchase a Greenhills lot, titling it in his own name with Jose’s knowledge and without objection. An implied trust under Article 1452 of the Civil Code was allegedly created. Upon the subsequent sale of the Greenhills lot for P54 million, Jose demanded a share, which was refused, prompting the lawsuit.
Petitioners moved to dismiss the complaint on grounds of failure to state a cause of action, prescription, and laches. The trial court denied the motion, ruling the issues were evidentiary and required a trial. Petitioners elevated this to the Court of Appeals via certiorari, which was denied. Meanwhile, for failing to file an answer, petitioners were declared in default by the trial court. Their motions to set aside the order of default and to admit their belatedly filed answer were denied.

ISSUE

Whether the trial court gravely abused its discretion in denying the motion to dismiss and in refusing to set aside the order of default and admit the attached answer.

RULING

The Supreme Court found no grave abuse of discretion in the denial of the motion to dismiss. A motion to dismiss based on failure to state a cause of action tests the legal sufficiency of the allegations in the complaint. The complaint sufficiently averred the elements of an implied trust under Article 1452, where property is purchased with funds of another, giving rise to a trust in favor of the latter. Whether the action had prescribed or was barred by laches involves evidentiary matters not determinable in a motion to dismiss but during trial. The trial court correctly deferred these issues.
However, the Court ruled the trial court committed grave abuse of discretion in refusing to lift the order of default. Default orders are disfavored; cases should be decided on the merits whenever possible. Petitioners’ failure to file an answer was due to their pending certiorari petition challenging the denial of their motion to dismiss, which they believed suspended the period to answer. While this belief was legally erroneous, it constituted a reasonable mistake, not a willful and deliberate refusal to obey court processes. The interest of justice demanded that petitioners be given their day in court to present their defenses on the merits, especially given the substantial amount involved. The default order was set aside, and the trial court was directed to proceed with the trial.